Ten years ago, you might have thought Blockbuster Entertainment was an unstoppable entertainment giant. The company had a near monopoly in the video and video game rental markets. At its peak in 2004, the company had 9,000 stores and 60,000 employees. Just six years later, the company went bankrupt. Blockbuster simply couldn’t compete with its cheaper and more convenient competitors (Netflix, Amazon and Redbox). The market had fundamentally changed and Blockbuster was not able to adapt quickly enough to the new reality of how movies are being rented. The business model of going to a physical store to rent VHS/DVD movies that took off in the 1980’s simply no longer worked. The idea came and went.
The Business Category Lifecycle
Every category of business has a natural lifecycle. New businesses, products, inventions come along and push aside what came before them. The movie rental store industry was a 30 year idea (1980-2010) only to be replaced by online rentals. Dial-up internet was popularized in the 1990’s, only to be replaced a decade later by high-speed internet services. Land-line phones became wide-spread in the early 1900’s and were largely replaced just over a century later by cell-phones. At some point, just about every type of product or service will be supplanted by something new. Even paper books that have been dominant for the last 600 years are beginning to be replaced by an electronic equivalent.
Often, the companies that were previously dominant (like Blockbuster) aren’t able to adapt to new realities of business. They cling to the business models that served them well for many years. They are surpassed by new companies that champion new product categories and new types of services. We see this with cable companies today. Consumers want always-available on-demand content served through the web from companies like Netflix, Hulu Plus, Amazon and Aereo, but cable companies addicted to the revenue from monthly cable subscriptions and aren’t willing to provide consumers what they actually want. As a result, consumers are quickly cutting their cable and moving to more consumer-friendly online services. I would be surprised if cable companies still exist in their current form 15 years from now.
Planning for Disruption
As an entrepreneur, it’s scary to think the economics of the industry you’re in may fundamentally change. The cash cow that you’ve had for years might be replaced by an upstart competitor that offers something quicker, cheaper and more effective. Unfortunately, we don’t know ahead of time if our business ideas are a 2-year idea, a 5-year idea, or a 50-year idea. We do know that at some point the natural life cycle of our businesses are going to come to an end. At some point, your business will fail. You can only hope that your business will continue to exist until the point that your industry is disrupted by some outside force, whether that be macro-economic forces, new competitors, new product categories or some other unknown black swan event. It’s a matter of when, not if.
It would be a lot easier if we knew in advance when our businesses would no longer be economically viable. We could plan ahead and start something new well in advance of when our businesses are going to get disrupted by something else. Since we can’t predict the future, we should plan assuming that our business may no longer exist in the near future. There are two ways to do this: get your finances in order and adopt a portfolio model of doing business.
By having a solid financial life, you’ll be able to personally weather a decline in income in the event that your business fails for whatever reason. I don’t have any special advice that Dave Ramsey, Clark Howard or Suze Orman wouldn’t offer. Reduce the amount of debt that you have, build a sizable emergency fund, live within your means, save for retirement and for your kids’ college. If you’re looking for a plan to follow, check out Dave Ramsey’s baby steps.
The Portfolio Model of Entrepreneurship
Adopting a portfolio model of business is a more complicated matter. A portfolio entrepreneur operates multiple businesses in different industries knowing that the income their businesses generate may ebb and flow over time. As one business grows, another might decline. By having a few different businesses, your income is more insulated in the event that one of your business fails. For example, I publish an investment newsletter, offer fundraising software to animal shelters and humane societies and operate a press release distribution business. If the stock market were to take a significant nosedive and my investment newsletter was no longer a viable business, I would still be able to rely on the income from my other two businesses while I work to replace the business that failed.
Don’t get me wrong. I’m not saying you should try to build three businesses at once. That doesn’t work. You should work on one business until it becomes self-sustainable and doesn’t require your day-to-day attention. At that point, you should look to diversify and try to build another income stream in a different category.
Buckle Your Seatbelt
Whether you’re an entrepreneur or an employee, it’s very likely the business that you’re involved with ten or twenty years from now won’t be the same business you’re involved in today. We shouldn’t be surprised when some outside force causes us to make a job or a business transition. It’s going to happen sometime, so be prepared for it.